Q: Which formula correctly calculates economic profit?

$$\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$$

Question 1

Which of the following best describes the concept of scarcity in economics?

Accepted Answer

Scarcity refers to the limited nature of resources relative to unlimited human wants.

Question 2

A society must answer three basic economic questions: What to produce, how to produce, and for whom to produce. Which of the following best explains how a market economy answers these questions?

Accepted Answer

By the interaction of supply and demand in markets.

Question 3

Suppose a consumer faces the following prices and marginal utilities: $$P_A = 2$$, $$MU_A = 10$$; $$P_B = 5$$, $$MU_B = 25. $$According to the utility maximization rule, what should the consumer do?

Accepted Answer

The consumer is already maximizing utility because $$\frac{MU_A}{P_A} = \frac{MU_B}{P_B} = 5.$$

Question 4

Which of the following best illustrates the concept of opportunity cost?

Accepted Answer

The value of the next best alternative forgone when making a choice.

Question 5

If the price elasticity of demand for a product is $$-2$$, what does this imply?

Accepted Answer

Demand is elastic; a 1% increase in price leads to a 2% decrease in quantity demanded.

Question 6

A production possibilities curve (PPC) is bowed outward. What does this shape indicate?

Accepted Answer

Increasing opportunity cost as more of one good is produced.

Question 7

Which of the following is a characteristic of a perfectly competitive market?

Accepted Answer

There are many buyers and sellers, and products are homogeneous.

Question 8

Suppose the market for apartments is subject to rent control, setting a maximum price below equilibrium. What is the likely outcome?

Accepted Answer

A shortage of apartments as quantity demanded exceeds quantity supplied.

Question 9

A monopolist maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 10

If two countries can produce two goods, and each has a lower opportunity cost in one good, what principle explains why they should specialize and trade?

Accepted Answer

Comparative advantage.

Question 11

Which of the following is an example of a negative externality?

Accepted Answer

A factory polluting a river, affecting nearby residents.

Question 12

If the cross-price elasticity of demand between two goods is positive, what does this indicate?

Accepted Answer

The goods are substitutes.

Question 13

Which formula correctly calculates economic profit?

Accepted Answer

$$	ext{Economic Profit} = 	ext{Total Revenue} - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Question 14

In the short run, a perfectly competitive firm will shut down if:

Accepted Answer

Price is less than average variable cost.

Question 15

Which of the following best describes the Prisoners' Dilemma in game theory?

Accepted Answer

Each player has an incentive to cheat, leading to a worse outcome for both.

Question 16

If a firm faces diminishing marginal product of labor, what happens to marginal cost?

Accepted Answer

Marginal cost increases as output increases.

Question 17

Which of the following is NOT a characteristic of monopolistic competition?

Accepted Answer

Barriers to entry are high.

Question 18

Suppose the price of a product increases. Which effect explains why consumers buy less of it and more of other goods?

Accepted Answer

Substitution effect.

Question 19

Which formula is used to calculate the price elasticity of demand?

Accepted Answer

$$	ext{Price Elasticity of Demand} = \frac{\% 	ext{Change in Quantity Demanded}}{\% 	ext{Change in Price}}$$

Question 20

Which of the following is a public good?

Accepted Answer

National defense.

Comprehensive Study Guide: Principles of Microeconomics Final Exam Learning Objectives

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